Buying a home could be one of the biggest achievements of a person's life. In most cases, it takes an entire lifespan to fullfil the dream of purchasing one's own home. Selecting the ideal property involves a lot of research and planning. Arranging funds is probably the toughest and the trickiest part of the process.
You could dip into your savings for the entire payment or decide to get a Home Loan at a good interest rate
A decade or so earlier, borrowing from a bank used to be a cumbersome process but today financial institutions have simplified the entire Home Loan application and disbursement process. All leading financial institutions offer Home Loans with attractive interest rates, flexible repayment periods, quick turnaround times and unique product features.
1. An accomplishment - Every individual dreams of owning a house in their name. A home loan allows you to accomplish this feat and realize your dreams. This is one of the biggest financial investments you make in your lifetime and can therefore be considered an accomplishment.
2. Capital appreciation- Land is an appreciating asset in most cases. Construction costs have also increased over the years. As rents get more expensive with inflation, investing in your own house can shield you from inflation.
3. Benefits in interest rate- In the 90's, banks used to charge up to 18% interest on loans. Today, you are able to get a home loan at 8.40% annually. The decrease in the interest rates coupled with capital appreciation makes it a dual benefit plan.
4. Tax benefits- The Government of India has played the biggest role in boosting the home loan sector. As per Section 24B of the Income Tax Act 1961, you get a deduction of 2 Lakhs towards repayment of interest towards loans availed for purchase/construction of house (if you or your family is living in the house). At the same time, Section 80CC read with Section 80 CCE of the Income Tax Act 1961 allows for a tax deduction up to 1.5 Lakhs on repayment of principal amount of the home loan. This is one of the greatest incentives for people to opt for a home loan, even if you are able to afford to buy your house with your savings.
After completing the above process, you can zero in on the loan provider. Keep all your documentation along with the application form ready and the AE team will contact you and assist you in the application process. This service comes at no cost to you!
The lender will verify all your documents. The next step is the valuation and legal scrutiny. Banks have their panel of evaluators and advocates to do this for them.
A personal discussion between the lender and the borrower is the next step on the agenda. The lender usually meets the borrower at their residence to get first-hand information about the borrower's income, property, investments, and also the source of funds to meet the margin requirements. This is a sort of a pre-sanction inspection carried out by the bank.
Once the verification and processing are over, banks provide you with a loan offer letter which contains the terms and conditions of the sanction. In case you choose to accept them, you need to sign one copy and deliver it to them followed by execution of the home loan documents. AE plays a big role in this regard and our experts will assist you every step of the way.
1. Purchase of a flat in an apartment complex - Banks finance their customers to buy flats in residential complexes. Here you have the concept of an Undivided Share (UDS) in the land.
2. Purchase of individual house - This is similar to the type of Home Loan described above however there is no concept of ownership of UDS. The entire land belongs to the borrower. Naturally, such houses have a better resale value.
3. Purchase of Land/Plot - Banks finance their customers for the purchase of vacant plot or land for subsequent construction of house. Usually, banks stipulate that the construction of the house should begin within one year of purchase of land for the loan to be treated as a Home Loan.
4. Construction of a house on own land/land purchased out of bank finance - You can avail a loan for constructing your house on your land. Banks have their methods of determining the cost of construction. Naturally, you need to obtain the requisite permission from the local municipal authorities for constructing your house on the land. You need to have an approved plan as well.
5. Home improvement/extension -You can approach a bank for financing home improvement or for extending the house. In the latter case, you need to have the requisite approvals and plans in place.
6. Balance Transfer - This facility allows you to switch over your Home Loan from one bank to the other. If you have a high-interest Home Loan, availing this facility can be useful. You could transfer your outstanding loan amount to another lender at low interest rate, thus saving on interest cost.
Various factors go into the determination of your Home Loan eligibility. The basic rules for salaried people and self-employed people are the same. Some banks stipulate a higher take-home pay percentage for self-employed persons.
1. Your current income - Salaried employees can submit salary slips for the last three months and furnish a bank statement for the past six months where their salary is credited. Self-employed professionals should submit the statement of accounts for one year where they receive the credits for the services rendered by them.
2. Continuity of employment/business - Salaried employees can rely on their income tax returns, Form 16, Form 26AS, etc to display their continuity of employment. They can also show a statement of the Provident Fund account to establish the links. Self-employed businessmen and professionals can furnish the income tax returns along with other financial statements like balance sheet and profit and loss statements. They can also furnish copies of invoices raised by their clients.
3. Current obligations - It is possible that an applicant might have pre-existing personal loans, vehicle loans, and other loans for which they might be paying instalments. You have to account for these instalments as well while calculating Home Loan eligibility.
4. Credit history -The repayment track record of the applicant is of utmost importance. Every bank or financial institution is a member of CIBIL or another credit bureau. These bureaus keep track of the loan activities of every borrower. Based on this information, they generate your credit history profile and quantify the same by generating your credit score. This is a number ranging between 300 and 900. The higher your score, the better are your chances of getting a loan. Naturally, it goes without saying that defaults, frequent requests for loans or missing payments can pull down your credit score. A score of 600 and above is considered fair for determining HL eligibility.
5. Value of the property -The value of the property you purchase is important. The financing bank needs to determine the cost of the project it is going to finance. Banks usually finance up to 75% - 90% of the value of the property (also known as LTV or Loan to Value Ratio) with the balance being your contribution or margin as they call it.
6. Legal position -The prime security for any home loan is a mortgage of the land and building they have financed. You have to create the mortgage and register the same with the respective registering authorities. In order to do so, you must be legally empowered to create the mortgage. Hence, banks and financial institutions insist on a legal scrutiny report from their panel of advocates who carry out a search for the previous 30 years to establish the ownership chain.
7. Age of the borrower -The minimum age of the borrower at the time of application of the HL should be 21. The age at the time of maturity should generally be 65 years. Some banks stretch this limit to 70 years
Every customer has to satisfy the Know Your Customer (KYC) norms stipulated by RBI. You have to provide the documents relating to your KYC, employment, business, and income.
Financial Documents - Employment or Business Proof
One of the biggest predicaments faced by the customers availing home loans is whether to go for a fixed rate of interest or a floating rate. In case you feel that the interest rates can rise in the future, it is better to go for a fixed rate. However, if you expect the rates to remain stable or go down, it is advisable to stick to a floating rate of interest.
Note, fixed rates of interest are usually 1.25% to 1.50% more than floating rates. Therefore, if you expect the rates to rise more than 1.50%, it will make sense to opt for a fixed rate. The chances of a steep increase are remote. The competition in the market is such that it will not allow the rates to fluctuate dramatically.
Many banks have a teaser-like interest rate system whereby they offer fixed rates for the first five years subject to a resetting option thereafter. This is also a good option to explore. The advantage of the fixed rate of interest is that your EMI remains fixed for the entire period of the loan. This is not the case in the floating rates. Banks are very quick to increase the EMI and demand the same when the rates go up. This can affect your overall budget. This is because even a difference of 100 per Lakh can result in an increase in the EMI by 3,000 in case you have a loan of 30 Lakhs